Thursday, August 11, 2005

Overstock Sues Rocker and Gradient

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Better Than American Idol, More Action Than Fear Factor…

This afternoon, shareholders of Overstock.com, along with the company, filed a groundbreaking suit against Rocker Partners, David Rocker, Marc Cohodes, Gradient Analytics (AKA Camelback), Donn Vickrey, and several other defendants in California State Court, alleging unfair business practices, and conspiring to denigrate Overstock.com's business so as to reap personal profits for themselves and for their companies.

The attorneys representing the plaintiffs are the O’Quinn Group, headed by Texas legend John O’Quinn, of big tobacco, Phen-Phen and DTCC suit fame. This is an extraordinarily well-funded consortium that can see this through to its inevitable conclusion, which will likely go on to name more entities and individuals going forward, as the facts of the case become known, and discovery is obtained.

Let me start off by saying that I’m not an attorney. I don’t claim any particular legal acumen, nor should my claims and comments be construed as any sort of statement of absolute fact – this is my opinion only, and should be taken as such.

Having said that, it appears to me that the inevitable has occurred. The bad guys have been caught with their hand in the cookie jar, and they are now going to benefit from a free and open disclosure of their misdeeds in an open court, and their techniques made part of the public record. If the claims in this suit are true, then the investors in the funds named are likely going to have significant cases against the managers of the funds, as the complaint alleges that they have participated in what to me could only be described as a systematic, organized campaign designed to depress the share value of OSTK, in order to create financial windfalls for the hedge funds and their associate conspirators. This takes on an ominous RICO characteristic, as if true we are talking a regular pattern of illegal behavior by disparate entities, colluding and acting in concert to achieve a criminal end result.

I applaud the plaintiffs for stepping forward and sending the message that this wholesale abuse of the system will not be tolerated, and I celebrate the attorneys who have stepped up to the plate to bring the perpetrators to justice.

For years, the shareholders of companies like NFI, PPD, KKD, TASR, TTWO, OVTI, NAVR, ACAS, ALD, and OSTK have been convinced that the precipitous drops in the value of those companies’ shares, and the seemingly coordinated assaults (including media attacks, class action suits, questionable regulatory probes, radio and television eviscerations, message board onslaughts by vocationally driven teams), were part of a Byzantine scheme driven by some dark force, some group that had so co-opted the regulators and the media that there was no hope of justice or fair treatment.

Now we have a face to put to the force, or at least the tip of the iceberg. Everyone should read the complaint and familiarize themselves with the charges. It would not surprise me a bit if this was followed by criminal charges being brought – if true, the alleged behavior is certainly criminal (in my untutored opinion) and deserves the prompt attention of regulators and the Department of Justice.

It’s interesting to me that the market greeted the news of the suit with an increase in the share price this afternoon. Other companies that have released news of lawsuits have experienced price drops – like NFI, when they sued PMI, and Herb jumped all over it, and the price declined precipitously. It is difficult to predict how the market will take news like this – but apparently the market liked the story. The bashing posters would have us all believe that this is folly, a nuisance suit, evidence of Byrne being unbalanced - but the market apparently sees things differently. I do hope that the trading from today becomes part of the case - it would be fitting if the trades turned out to be the same accused perpetrators selling more non-existent shares in a further effort to damage the company's share price. How much clearer would it have to be?

It is ironic that Dr. Byrne offered fair warning of discrepancies and concerns over the company’s trading in the last conference call. I’ve been wondering for some time how a company like OSTK, whose shares are essentially 100% owned by the Byrne family, their friends, and institutions who are intimately connected with them, could have huge a such a huge short interest, really un-coverable without driving the price into the stratosphere. Well, here’s an explanation. The bad guys allegedly intended to drive the company into the dirt while breaking the law – a handy way of investing, if true, as you don’t have to be correct about the company, just adequately funded and motivated to do whatever it takes.

I cannot believe that there isn’t a huge element of truth to the charges – they certainly resonate with me, and what I have been saying for some time. Now I suppose we will get to find out whether these poor hedge funds and their associates are being unjustly accused, or if they are actually as dirty and vile as we have long suspected. My hunch is that the stink wafting from this is going to turn out to be overpowering, and will involve big and influential Wall Street names before it is over, and will finally force the “see no evil” regulators to confront the decay and morbidity in the system, as well as within.

This is a huge blow to the hedge funds’ bankers as well, as if they have been complicit in aiding this organized predatory scheme, they will get sucked into it, as will the investors in the funds, their satellite of media cronies, complicit money men, and their dirty tricks operatives. As this unfolds, I am confidant that the truth will prevail, and if the allegations are true the ugly web of lies, deceit, larceny, misappropriation, collusion, etc. will unwind and strangle the perpetrators.

It can only be a matter of time before the other companies that have been preyed upon follow this lead and we see other legal challenges to a practice that the system seems content to ignore. This marks an important day for investors, and for the companies that have been targeted by this network.

It is a day that many have been waiting for, and a few have been dreading.

I shall follow the proceeding with interest.

Pundits have long been expecting a cartel of hedge funds to implode, creating a cascading domino effect in all the companies that they are short, their leverage now their worst enemy - speculating as to what the trigger would be.

Folks, I think we have ourselves the trigger.

Now, I’m sure that the industry will circle the wagons, and decry this as foolishness, and pretend that it isn’t happening, just as they have with Dr. Byrne’s now famous Q2 conference call, wherein he compared the short position in OSTK to a bus hurtling towards a cliff, while he tried to warn that the bridge was out. I’m certain that the network of enormously influential friends and co-conspirators will actively try to spin this as a non-issue, even as they eye one another for signs of flop sweat or cooperation with the authorities…as they try to figure out who will be the most likely to roll. Once it registers on them that this isn’t going to go away, and that the whole ugly truth will be known, that there isn’t any way to cover this up (as they have apparently been doing for years), you can expect distancing from the bomb blast zone. Nobody is going to want a piece of this when it becomes clear that it is going to reveal all.

I would think that the brokers that facilitate this sort of game are at risk now, as it can only be a matter of time until their role is uncovered. I would believe that they have to be trying to figure out what happens next. I’m quite confident that there are calls going out to reassure everyone that it is all going to be fine, we are good for it, have no fear, we’ve weathered worse than this. The problem is that they haven’t – the only time they’ve even come close is when L&H filed against many of the same bad guys, and they didn’t have the financial staying power to fight to the conclusion – that, and the company was up to no good. That wasn’t a challenge – that was a softball. This is the A team coming over the hill with guns blazing. A legal team with virtually limitless financial resources and access to the very best talent, well prepared for the inevitable barrage of counter-measures and stalling tactics, ready to dismantle the ugly machine and show the world its component parts.

I have a feeling the names in this are a who’s who of Wall Street, and wouldn’t be at all surprised if you see a full court press to discredit everyone and everything associated with this effort – the plaintiffs, the attorneys, the company (even thought they aren’t a party to the suit), Dr. Byrne, probably even me (I’m not a plaintiff, but they just don’t much like me, so I expect that they will target me for a slamming). I can hardly wait to see the first salvo from the hedge fund quislings, the Carols, the Jesses, the Alperts, the lapdogs, the Jeff (making things up, as usual) all professing that this is stupid, or unfair, or typifies companies that are in trouble, etc.

The spin machine will likely now go full speed, as the bashing crews are currently doing on the message boards – no conspiracy there, folks, no siree.

All of which won’t change the story that the trading records and emails and phone logs will tell. And that is, at the end of the day, their problem. The trading tickets will tell the story, just as they did in Operation Bermuda Shorts, where a far less sophisticated group was caught with over 1200 accounts to do related party trading and evade the US rules, preying on OTCBB companies. There are no new ideas.

This suit is the first step in the process of the market getting a glimpse of the seedy underbelly of the industry, and the predatory practices that are its stock in trade. It should be quite a show.

And we have ringside seats.

Popcorn, anyone?

2 Comments:

Blogger n-tres-ted said...

Bob, the complaint alleges shorting and bashing, but not naked shorting as I read it. Any indication whether naked shorting will come to the fore in the discovery of evidence?

9:02 PM  
Blogger particleswaves said...

Hey Bob: Tops commentary on Byrne this morning. Just because you're paranoid doesn't mean they aren't out to get you...watch your back...but you knew that.

Hope one day to have a drink with you, Dave Patch, Dr. Patrick Byrne and a few other fine folks primarily responsible for uncovering and publicizing cancer in the marketplace.

ds

9:09 AM  

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